Britain, India, Italy Finish 2016 in Worse Shape

EghtesadOnline: Three of the world’s top 10 economies are ending the year in worse shape than they started. And they’ve only got themselves to blame.

News ID: ۷۷۲۷۳۱

30 December 2016

Two referendums and an unparalleled currency experiment have left them facing a very uncertain 2017, news outlets reported.

In 2016, the good news is that the major potential pitfalls were avoided and, in the process, global economy registered another year of economic growth, increased employment, and moderate inflation.

The potential bad news is that the major elections in 2016 signal that large swaths of the population no longer see deeper economic and political integration as beneficial.

Elections have consequences, and the year ahead will tell us a lot about what US voters actually signed on for, Financial Tribune reported.

Britain

The first jolt of the year came on June 23, when the people of the UK voted to leave the European Union. The Brexit referendum had an immediate impact on global markets, sending shares crashing. They soon recovered, but the biggest loser was Britain’s currency, CNNMoney reported.

The pound crashed to its lowest level in over 30 years against the dollar. It has steadied since but has still lost 18% of its value, pushing up the price of everyday goods. Inflation will accelerate next year.

But more damaging is the uncertainty the British economy faces in breaking up with its biggest trading partner, and the threat that companies may move operations out of the country.

A majority of managers in the UK believe Brexit-related uncertainty will hold back economic growth next year and almost half think leaving the UK will be a drag in the long term, according to a survey.

In a survey of 1,118 managers, the Chartered Management Institute found 65% were pessimistic about the UK’s economic outlook for the next 12-18 months. Their caution over 2017 followed what appeared to be a tough year for many organizations, when only 39% said they had grown, the lowest proportion since 2012 when the shockwaves from the eurozone debt crisis hit the UK economy. A further 39% said business levels had stayed roughly the same in 2016 and 22% said their business had declined.

India

What happens when a country that lives on cash abruptly decides to ban the vast majority of its banknotes? India was forced to find out on Nov. 8, when Prime Minister Narendra Modi announced that 500 rupee and 1,000 rupee notes would no longer be legal. They would be replaced with new 500 and 2,000 rupee notes.

The shock move caused chaos for millions of people who struggled to get their hands on the new money. Businesses have suffered from the cash crunch, and India’s high-flying economy is suffering as a result.

India’s 7.3% growth rate, the envy of every major economy, is expected to slow dramatically. The Reserve Bank of India has already cut its growth forecast for the current fiscal year by 0.5%; analysts say the damage could be much more severe than that.

The government says the rupee ban was aimed at combating tax evasion and counterfeit currency, and will benefit India in the long run.

Italy

On Dec. 4, Italians voted overwhelmingly against constitutional reforms proposed by Prime Minister Matteo Renzi. The reforms were aimed at ending political gridlock and reviving Italy’s stagnant economy.

Renzi resigned the next day. The ensuing political and economic uncertainty has already claimed one casualty—nervous investors refused to provide the world’s oldest bank, Monte dei Paschi di Siena, with the $5 billion it urgently needed to stay afloat.

The Italian government has been forced to step in with a bailout, drawn from a $21 billion rescue fund that will add to the country’s huge debt mountain of $2.34 trillion.

Italy’s banks are just one lingering headache. The threat of early elections has receded but not gone away. If they happen, populist parties of left and right could ride a wave of public discontent with Europe.